Brokers' Settlement Records Often Wiped Clean
Tuesday, September 25, 2007
NEW YORK, Sept. 24 -- A new study suggests that securities arbitrators often agree to requests by brokers who want settlements paid to angry investors expunged from their records. This could leave future investors unaware of the brokers' past actions.
The study found that arbitrators at the Financial Industry Regulatory Authority, the largest non-government regulator of securities firms, recommended that records be expunged 98 percent of the time. More than 70 percent of such decisions were reached without hearings, despite new rules that records can be purged only if the complaint is found to be erroneous, false or did not involve the accused broker.
"How can you approve giving a broker a clean slate without holding a fact-based hearing?" said Steven B. Caruso, president of the Public Investors Arbitration Bar Association, which conducted the study. "What everybody thought was going to be a solution to the problem is in fact not. . . . Information is still being improperly removed from the registration record of brokers without any stop-gap in place."
FINRA officials disputed that claim, saying the number of expungements had dropped significantly since the rules were enacted three years ago, the first time standards were put in place for determining which records can be erased.
"I think the rule is working. But it's still way early in the game," said Jay Cummings, FINRA's executive vice president of regulation and disclosure. "If we need to make amendments, we will."
Some regulators, FINRA officials and investors' attorneys say arbitrators alone are not to blame. Those filing complaints, generally small investors who think their brokers made dubious bets or misled them into money-losing trades, often agree not to fight an expungement as a condition of settlement. That was the case in 93 percent of the settlements in the study, Caruso said.
"The problem really arises because the understandable primary goal of the claimant is to be compensated for whatever problem arose in their account and with their rep," said Melanie Senter Lubin, securities commissioner for Maryland who is on a committee studying the issue. "Their goal is not necessarily to worry about the integrity of the registration disclosure system for brokers. So there's an inherent tension between what their goals are and what regulators would like to see in the system."
Caruso acknowledged that investors "definitely bear some responsibility," but arbitrators ultimately are supposed to determine whether the settlements warrant expungement. "Our study indicates most of them just rubber-stamp it," he said.
The study, released Monday, looked at 200 cases in 2006 that were subject to the new rules. In the cases, the two parties negotiated settlements without a hearing on the merits of the claim before arbitrators.
Such cases represented a fraction of the settlements in 2006, prompting FINRA to say that the lawyers' group had "selectively" used the agency's statistics.
Caruso said the Public Investors Arbitration Bar Association focused on the cases in the study because, with no arbitrators involved in the hearings, regulators had previously cited the case as a particular source of concern.
In one instance, the study found, arbitrators agreed to 18 expungements for a single broker, Joseph Karsner IV of Karsner & Associates in Gambrills, Md. As with all expungement recommendations, a federal court's approval was required.
According to a complaint filed by Lubin's office, Karsner recommended unsuitable investments to clients without properly informing them of the risks. Karsner did not return phone calls, but his attorney, Richard J. Magid, denied the allegations.
He said the complaints were made by those who "panicked and sold at the bottom of the market" despite Karsner's advice to stay the course. Magid said the settlements were reached between the complaints and Karsner's insurance company. "They got settled from under him," Magid said.
Expungements have been subject to criticism. In 1999, the National Association of Securities Dealers, the group that preceded FINRA, imposed a moratorium on record-purging until rules could be strengthened. In late 2003, the Securities and Exchange Commission approved the rules, which went into effect in 2004.